The Ultimate EIS Checklist: A Comprehensive Guide for London-Based Startups

December 18, 2022

As a startup, it’s essential to have a solid understanding of the various funding options available to you. One option that many entrepreneurs in London consider is the Enterprise Investment Scheme (EIS). This government-backed program provides tax relief to investors who support small, high-risk trading companies.

But before diving into the EIS, it’s crucial to have a thorough understanding of the eligibility requirements and the application process. That’s where this EIS checklist comes in. We’ve compiled all the essential information you need to know to determine if EIS is right for your startup and to successfully apply for funding.

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a government-backed program that provides tax relief to individuals who invest in small, high-risk trading companies. The aim of the EIS is to encourage investment in these types of companies and to help them grow and succeed.

Under the EIS, individuals who invest in qualifying companies can claim income tax relief on the amount invested. This means that the investor can reduce their tax bill by the amount of their investment, up to a certain limit. The EIS also provides Capital Gains Tax (CGT) relief, which allows investors to defer paying CGT on any gains they make on the investment.

Is my startup eligible for EIS funding?

To be eligible for EIS funding, your startup must meet certain criteria. First and foremost, your company must be a trading company, meaning that it must be actively engaged in a business activity with the primary aim of making a profit.

In addition, your company must meet the following requirements:

  • It must be based in the UK and have fewer than 250 employees
  • It must have gross assets of less than £15 million before the investment and less than £16 million after the investment
  • It must not be listed on a recognized stock exchange
  • It must not be controlled by another company
  • It must not be engaged in certain prohibited activities, such as certain types of financial services or certain types of property development

How do I apply for EIS funding?

If your startup meets the eligibility criteria, the next step is to apply for EIS funding. Here’s a step-by-step guide to the process:

Step 1: Prepare a business plan and financial projections Before you can apply for EIS funding, you’ll need to have a clear understanding of your business and its financial needs. This means preparing a comprehensive business plan and financial projections. Your business plan should outline your business concept, target market, competitive advantage, and financial projections. It’s also a good idea to include details on how you plan to use the EIS funding and how it will help your business grow.

Step 2: Find an approved EIS provider EIS funding is not provided directly by the government but rather through approved EIS providers. These are typically venture capital firms or angel investor groups that have been approved by the government to provide EIS funding. You’ll need to find an approved EIS provider that is willing to invest in your startup.

Step 3: Negotiate the terms of the investment Once you’ve found an EIS provider, the next step is to negotiate the terms of the investment. This includes the amount of funding you’ll receive, the equity stake the investor will receive in your company, and any other terms and conditions. It’s important to have a lawyer review the investment agreement to ensure it’s in the best interests of your company.

Step 4: Obtain advance assurance from HMRC Before you can accept the investment, you’ll need to obtain advance assurance from HMRC that your company and the investment meet the EIS eligibility criteria. To do this, you’ll need to complete an application form and provide supporting documentation, such as your business plan and financial projections.

Step 5: Accept the investment and claim your tax relief Once you’ve received advance assurance from HMRC and the investment has been finalized, you can claim your tax relief. This typically involves completing a self-assessment tax return and claiming the EIS income tax relief. You’ll need to provide proof of the investment, such as a copy of the investment agreement and any supporting documentation.

What are the benefits and drawbacks of EIS funding?

EIS funding can be a great option for startups, but it’s important to weigh the benefits and drawbacks before deciding if it’s right for your company.

Benefits:

  • Tax relief: As mentioned, one of the main benefits of EIS funding is the tax relief it provides to investors. This can be a significant advantage for startups that are looking to raise capital.
  • Access to funding: EIS funding can be a good option for startups that may have difficulty obtaining funding from traditional sources, such as banks.
  • Experienced investors: Many EIS providers are experienced investors who can provide valuable guidance and mentorship to startups.

Drawbacks:

  • High-risk investment: EIS funding is intended for high-risk investments, and there is no guarantee of success. This means that investors could potentially lose their entire investment.
  • Complex application process: The EIS application process can be complex and time-consuming, which can be a challenge for startups that are already stretched thin.
  • Equity dilution: To secure EIS funding, startups may need to give up a significant equity stake in their company. This can be a drawback for founders who want to retain control of their business.

Tips for a successful EIS application

If you’re considering applying for EIS funding, here are some tips to increase your chances of success:

  • Make sure your startup is eligible: It’s essential to carefully review the EIS eligibility criteria to ensure that your company meets all the requirements.
  • Prepare a comprehensive business plan: A well-written business plan is crucial for securing EIS funding. Make sure to include detailed financial projections and a clear plan for how you’ll use the funding to grow your business.
  • Find the right EIS provider: Look for an EIS provider that is a good fit for your startup and has a track record of success. Don’t be afraid to negotiate the terms of the investment to ensure it’s in the best interests of your company.
  • Seek professional advice: The EIS application process can be complex, so it’s a good idea to seek the advice of a lawyer or financial advisor. They can help you navigate the process and ensure that you’re making the best decisions for your business.

In conclusion, the Enterprise Investment Scheme (EIS) can be a great funding option for startups in London. By following this EIS checklist and seeking professional advice, you can increase your chances of securing the funding you need to grow your business. So, it’s always wise to consider EIS funding as one of the options for your startup’s capital

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